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How Uncertain are NAIRU Estimates in Colombia

  • Juan Manuel Julio

    ()

Most of the proposed macro models and Phillips curves for policy design and analysis in Colombia depend on estimates of the potential output. However, it is widely known that this estimates are highly unreliable because of its level of estimation uncertainty. Following Staiger et al.(1996), we explore some common and not very common "fully structural" estimates of the NAIRU, the Non Accelerating Rate of Unemployment, provide confidence bands, and formally test the constancy hypothesis on the NAIRU. We also study the robustness of this results to the specification of the Phillips Curve. We find more reliable estimates of the NAIRU than previous estimates of the output gap, and find evidence in favor of a non constant NAIRU. Our results indicate that it has increased about 4 percentage points along the sample span. However uncertainty results are not robust to specification. There a single policy implication: An increasing NAIRU along wiith a policy of reduction and stabilization of inflation may imply increasing unemployment levels. Since the NAIRU is the component of unemployment that do not respond to monetary policy, it is up to the goverment to design policies for its reduction.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 184.

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Handle: RePEc:bdr:borrec:184
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  1. Javier Gómez & Juan Manuel Julio, . "An Estimation of the Nonlinear Philips Curve in Colombia," Borradores de Economia 160, Banco de la Republica de Colombia.
  2. Robert G. King & Mark W. Watson, 1994. "The post-war U.S. Phillips curve: a revisionist econometric history," Working Paper Series, Macroeconomic Issues 94-14, Federal Reserve Bank of Chicago.
  3. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, vol. 13(03), pages 315-352, June.
  4. Douglas O. Staiger & James H. Stock & Mark W. Watson, 1997. "How Precise Are Estimates of the Natural Rate of Unemployment?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 195-246 National Bureau of Economic Research, Inc.
  5. Juan Manuel Julio & Javier Gómez, 1999. "Outpout Gap Estimation, Estimation Uncertainty And Its Effect On Policy Rules," BORRADORES DE ECONOMIA 003309, BANCO DE LA REPÚBLICA.
  6. Jairo Núnez & Raquel Bernal, 1997. "El Desempleo En Colombia: Tasa Natural, Desempleo Cíclico Y Estructural Y La Duración Del Desempleo, (1976-1998)," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
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